Estate Planning vs Wills vs Trusts: Know the Difference
Estate planning involves any planning related to the disposition of property after (and sometimes before) a person’s death. A will is a document where you specify how your property will de distributed after your death. A trust is a legal entity where one person controls property for the benefit of another.
You’ve likely heard the terms “estate planning”, “wills”, and “trusts” tossed around, but you may be confused about what these terms mean. In this article, I’ll explain these terms.
“Estate planning” is a broad term that encompasses any planning for the disposition of property after a person’s death. Estate planning may include wills, trusts, joint tenancy, transfer on death deeds, life insurance policies, and anything else that may relate to how property will be distributed after a person’s death.
Estate planning may also include planning for future events during life. For example, many estate planning lawyers also draft living wills, powers of attorney, and advance directives, that specify a person’s wishes if the person becomes incapacitated. Estate planning can also include gifts or distributions of property during a person’s lifetime. Estate planning can also include nominating a guardian for a minor child, or a child with special needs, in the event that a parent dies or becomes incapacitated.
A will is a document in which the person who makes the will (the “testator”) outlines who should inherit his property after he dies. Thus, a will is, by definition, part of an estate plan. But not all estate plans include wills.
One of my law professors said that “will” is a term of art. Some people have written wills without even knowing it. For example, Oklahoma law (and the law in many other states) says that a “holographic will” is a will that is entirely in the testator’s writing, and signed and dated by the testator. There are many cases where a person has written a letter in which he describes how he wants his property distributed after he dies. Courts have admitted the letter to probate as a will if the letter was handwritten, signed, and dated. (One notorious case of this occurred when Charles Kuralt, the TV reporter, wrote a letter to his mistress saying that he wanted his mistress to inherit his property. Much to the disappointment of Kuralt’s family, Kuralt’s mistress was able to get the letter probated as a will.)
If a person executes a will, then the will often needs to go through “probate” – a process where a court orders the estate distributed. Even the simplest probate can take several months and cost thousands of dollars. Because of this, many people, when planning their estate, choose will substitutes. I describe various types of will substitutes elsewhere on this site.
A trust is a legal entity where one person controls property for the benefit of another. The person who controls the property is the “trustee” or the legal owner; the person for whose benefit the property is controlled is the “beneficiary”, or the beneficial owner. Although many people use trusts to plan their estates, trusts can be used for other purposes besides estate planning.
A trust does not need to be in writing. Courts have found trusts to be enforceable even when created orally. (However, it’s a good idea to have your trust written down, so that there can be no dispute.)
There are many misconceptions and misunderstandings about trusts. Whenever a client tells me he wants a trust, I ask him if he knows what a trust is. So far, I have not had a client who can give me the correct answer to this question. For example, one client asked if a bank has to be involved in creating a trust. Although many times banks are involved in trusts, a trust can be totally separate from a bank, with no bank involvement at all.
Unfortunately, many unscrupulous promoters take advantage of these misconceptions, and have deceived people into paying them large amounts of money to create trusts. In another blog post, I refute some of the myths about trusts. If someone has told you that you need a trust, be sure to confirm this with a qualified legal or financial advisor whom you trust.
Would you like to discuss your estate plan? Contact the Persaud Law Office
The Persaud Law Office has prepared estate plans, wills, and trusts for many people. If you would like help creating an estate plan that meets your needs, contact us today.